Retail Construction Hits a Red Light

Consumers are checking discretionary spending and, seemingly everyday, new retailers come out with announcements that they are filing for bankruptcy, shuttering stores and constraining expansion plans. As a result, construction is coming to a screeching halt at projects across the country as developers reevaluate proposed centers' economic viability.

Most recently, site work of the planned 215-acre open-air center, Bridges at Mint Hill in Charlotte, N.C., came to a halt. Chicago-based General Growth Properties and local partner Childress Klein Properties originally announced plans for the center in June 2005. It was slated to open in 2007. A series of delays pushed projected completion back to 2009. As for now, no new timeline has been announced.

Elsewhere, Memphis, Tenn.-based Poag & McEwen Lifestyle Centers scrapped plans to build Boise, Idaho's first lifestyle center, a 200,000-square-foot, $50 million project. The developer initially had planned to open the center in 2009. Now the project no longer appears on the company's list of new developments on its Web site. Poag & McEwen did not return calls seeking comment.

CBRE/Torto Wheaton Research, a Boston-based research firm that tracks completions of neighborhood and community shopping centers, estimates that developers delivered 6.3 million square feet of space in those sectors during the second quarter--two-thirds of the planned 9.7 million square feet of space that was supposed to come online. “That, to me, signals that some of the projects are being either taken away or delayed,” says Abigail Marks, economist at CBRE/Torto Wheaton.

However, Marks forecasts the full impact of the current downturn won’t be realized until next year, when only 14.7 million square feet of new neighborhood and community center space is projected to come on-line. In the first half of this year, developers in the U.S. began construction on 71 million square feet of retail space, according to CoStar Group, Inc., a Bethesda, Md.-based commercial real estate information provider. That figure represents a 24.5 percent decrease compared to the first half of 2007, when construction was started on 94 million square feet of new projects.

With the conditions in the retail sector deteriorating precipitously, real estate developers are abandoning projects that appeared to be sure bets a year or two ago. As retailers pull back, many developers have opted to forgo construction of centers that have gone so far as breaking ground. That trend is expected to escalate as the retail market continues to deteriorate, says Gary E. Mozer, managing director/principal with George Smith Partners, a Los Angeles-based real estate investment banking firm. Speculative projects in secondary and tertiary markets especially face a risk of being delayed or scrapped, Mozer says.

The credit crunch is in part responsible for the increase in construction halts and delays. The market's capacity to finance new projects has diminished with CMBS issuance year-to-date down to $12.1 billion from $158.9 billion during the same period in 2007, according to Commercial Mortgage Alert.

To help address the void, Continental Retail Development, in Columbus, Ohio, has formed the Continental Opportunity Fund, a $200 million fund, to provide equity and mezzanine financing for retail developments that have a first mortgage, but require additional funds to begin construction. It will contribute as much as $40 million towards a project.

One reason there hasn't been an even steeper decline in completions this year, says Continental's CEO David Kass, is that most of the financing for retail projects scheduled for delivery this year was completed years ago. Retail centers scheduled to come online after 2008 will be hit harder, he says. Completions in 2009 could be off by as much as 70 percent, Kass estimates.

For example, unable to shore up financing for its $3 billion project, the Grand, in downtown Los Angeles, Related Co. sought and received approval by city officials to delay the groundbreaking of its 3.6 million square foot mixed-use center by eight months, until Feb. 15, 2009. If Related does not begin construction by that date, the city of Los Angeles has the option to impose a $250,000-a-month penalty for up to 24 months. The Grand's groundbreaking has already been delayed three times. Related says it was due to design considerations and not because of financing. Read more here.

A spokesperson for Related says the firm is in the process of putting together the necessary construction documents, which is why it still hasn’t secured a construction loan. As the debt markets have tightened over the past year, lenders won’t negotiate with a developer until all the paperwork is complete, she added.

Mozer says banks would rather lend on a cash-flowing asset than a construction project because you don’t have as much lease-up risk. For Continental to provide financing, a project must have committed anchors and at lease 50 percent of its leases signed.

The ebb in retailers’ expansion is a big issue, according to Bernie Haddigan, national director of the retail group with Encino, Calif.-based Marcus & Millichap Real Estate Investment Services. “I don’t see retailers getting more aggressive at this point,” he says. “I see them getting more cautious.”